Imagine trying to build anything important without some type of blueprint or specification. This would be especially chaotic if there were a lot of people involved. In product design, it is common to start with an initial specification or a requirements document. This sets the foundation for the decisions, priorities, and trade-offs that are invariably part of the design process. This seems like an intuitive, common sense approach to designing a good solution. So why do people treat their supply chain design so differently? While most companies have a vague idea about what they want to achieve (e.g. “shorter lead-times”, “more flexibility”, etc.), they do not have a definitive specification. In this newsletter, we will discuss what a supply chain specification might include and how to go about designing to that spec.
Customer Lead Time
All good designs have an eye towards what the customers want and what is important to them. When discussing the lead-time that is offered to customers, the perfunctory answer you get is that “lead-times should be short!” But how short should they be? And where does accuracy come into play? Some customers would prefer a slightly longer lead-time if the company could offer it consistently and always deliver on-time. You also need to consider the financial trade-offs in offering different lead-times. In one recent analysis we completed, a 30% increase in customer lead-time led to a 67% drop in uncovered inventory risk. Depending on the market you are serving, and the competitive landscape, that might be a reasonable trade-off.
In order to establish the right customer lead-time, you need to look at how your customers are ordering your product, what channels you go through before reaching the end user, the relative importance of different products/markets, and the risks you are willing to take given financial considerations like margin and profitability. Based all of these factors, you should set a lead-time that the stakeholders (product management, finance, operations) can agree to and then measure to that number. When we have facilitated these conversations for companies, we often see a shift from a “one size fits all” approach (e.g. everything must be available off-the-shelf), which can be costly and less effective, to a more balanced solution. Within your company portfolio of products, you might have some important products or markets where short availability and broad flexibility coverage are critical, but you are also likely to have some more established products going to less important markets where you can stretch lead-times and reduce risks.
Flexibility
One of the corollaries to customer lead-time is flexibility. If the world were static, it would be easy to offer a fixed lead-time to your customers. Given the dynamic nature of the business, customer demand can be higher than expected, and supply is affected by issues like material shortages, capacity constraints, and quality problems. You can plan for and mitigate all of these issues. The degree to which you protect against all of these factors will affect your cost. Planning for a 100% upside inside of lead-time is going to take more time and resources than planning for a 20% upside. Also, planning for a 100% upside at 4 weeks requires more resources than the same upside at 12 weeks. So there are two factors you need to consider – the magnitude of the flexibility and the time frames. Instead of picking numbers randomly, you should make an informed decision based on the customer requirements, the actual variation you are likely to see, the cost of different scenarios, the relative importance of the product and the market within your company portfolio, and what your competitors are doing.
Once you make decisions, you need to be diligent about implementing solutions that actually achieve the goals. Just like you would do with a product specification, once you establish the limit, you are going to want to test to make sure you can deliver as advertised. Too often, we see companies develop numbers and put them in policy documents or contracts but never do the work to confirm that they can consistently achieve the planned results.
Inventory Exposure
Just as cost might be part of a product specification, Inventory Exposure should be part of a supply chain specification. This is a measure of the inventory risk in the extended supply chain. Companies can begin to control their long-term inventory expenses (e.g. cost of capital, write-offs, insurance, storage, etc.) by managing Inventory Exposure. There are many levers and control points with respect to Inventory Exposure and the best time to lay a healthy foundation is when you are designing your supply chain. By understanding the issues, companies can ask the right questions and make the appropriate trade-offs for their business. Inventory Exposure can be specified in a number of ways including the total amount of Inventory Exposure or the Inventory Exposure Turns.
Of all of the specification areas we have discussed, this requires the most detail and attention. To calculate Inventory Exposure, you need access to a product’s bill-of-material (BOM) structure, costs associated with different parts and processes, internal lead-times, and most importantly, supplier lead-times. By time-phasing when certain components and process are initiated, you can assess the risks that are accumulating in the extended supply chain.
Conclusion
You can build a better supply chain, and serve the needs of your company more fully if you design your supply chain based on a defined specification. You are more likely to get the desired results if there is formal agreement on what you want and the trade-offs that are right for your company. The three factors we have discussed set the foundation for a supply chain spec. By addressing these in advance, you will set your supply chain on a healthier course and avoid reactive responses to inventory and flexibility problems later.
Symphony has implemented a program for several clients called the Harmonized Supply Chain, which deals with the process of understanding a product’s needs and building a matching supply chain solution. If you are interested in hearing more about this, contact us at info@symphonyconsult.com.